Popular Economics Weekly
Where is the promised growth, with almost full employment? GDP growth was revised up from 1.5 to 2.1 percent Q2 to Q3, and is up 2.2 percent annually? When, if ever, will it return to the historical norm of plus 3 percent growth, last achieved in 2010, when government stimulus spending from ARRA and TARP helped to save US from another Great Depression?
So why is the Fed now talking about raising their interest rates in December? It won’t do anything for growth—in fact will make goods and services more expensive for lower and middle income earners—those whose incomes have barely risen.
The latest third-quarter GDP is revised to an annualized plus 2.1 percent, up 6 tenths from the initial estimate but showing less strength by the consumer with final sales now at plus 2.7 from plus 3.0 percent. Higher inventories are a big factor in the upward revision. Rising inventories add to GDP growth, because they measure increased production. In this case, it was still below last quarter’s huge buildup, so this subtracted just 6 tenths from Q3 GDP vs an initial 1.4 percent subtraction.
The core Personal Consumption Expenditure Index (PCE) is the Fed’s most important inflation reading and it is not showing rising pressure, even though real disposable income—income after taxes and inflation factored in—is above 4 percent. Why? Because consumers are saving more, with the savings rate up to 5.6 percent. All those cost savings from lower gas prices are being saved at the moment.
So the overall PCE price index remains nearly dead flat, which could give a boost to durable spending during the holidays. But that might depend on what happens to interest rates. The PCE price index is up only 0.1 percent, vs expectations for a 0.2 percent gain, with the year-on-year rate at a very telling and extremely low plus 0.2 percent.
Net exports pulled GDP down by 2 tenths because the dollar has become more expensive, and raising interest rates will make the dollar even more expensive for foreign buyers. Exports rose only 0.9 percent in the quarter, down 1 percentage point from the initial reading. Readings on residential investment, adding 2 tenths to GDP, and nonresidential fixed investment, adding 3 tenths, are little changed.
Lower exports hurt the manufacturing sector, which is already suffering from lower worldwide demand as evidenced by falling commodity prices. In other words, inflation is much too low for the Fed to raise their rates now. It could hurt both domestic and foreign demand for our goods and services.
Harlan Green © 2015
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